Musings on Economics, Finance, and Life

Posts Tagged ‘Environment’

Carbon dividends are the hottest idea in climate policy. A diverse mix of progressive and conservative voices are backing the idea of returning carbon tax revenues to households in the form of regular “dividend” payments. So are a range of businesses and environmental groups. Two weeks ago, six House members—three Democrats and three Republicans—introduced carbon dividend legislation.

Here is the idea: A robust carbon tax would cut emissions of carbon dioxide and other gases that are threatening our climate. It also would indirectly increase taxes on consumers and raise significant revenue. Carbon dividends would distribute that revenue back to households through regular payments, thus softening the financial blow of the tax while still reducing emissions. (Of course, the revenue also could be directed to other purposes.)

While the premise is simple, the details of implementing carbon dividends are complex. Policymakers face a range of philosophical, political, and practical issues. In a new report, How to Design Carbon Dividends, my Tax Policy Center colleague Elaine Maag and I explore those issues. Our work was funded by the Climate Leadership Council, an advocate for carbon dividends (full disclosure: I am a senior research fellow with the organization).

Two distinct philosophic views animate carbon dividend proposals. One sees dividends as shared income from a communal property right. Just as Alaskans share in income from the state’s oil resources, so could Americans share in income from use of atmospheric resources.

The second sees dividends as a way to rebate carbon tax revenues back to the consumers who ultimately pay them.

Though these ideas can be complementary, they have different implications for designing carbon dividends. The communal property view, for example, implies people should receive identical dividends that would be taxed as a new source of income. But those who see dividends as a tax rebate would link the payment to a person’s carbon tax burden and make the payment tax-free. Similar differences arise for dividend eligibility, the treatment of children, and other issues.

Elaine and I show how dividends should be designed under each of these views. But we do not recommend either pure approach. Political and practical concerns also matter.

Instead, we suggest a hybrid model that combines the best of both ideas. As a starting point, we suggest US residents with Social Security numbers (a group that could be expanded) would be eligible for dividends that would be paid out quarterly. Adults would receive equal dividends. Children would receive half as much as adults. Dividends would not be taxed as income, nor would they be treated as income in means-tested benefit programs such as SNAP (food stamps).

Our proposal strikes a balance among the philosophical, political, and practical issues. Paying identical dividends to adults, for example, reflects the communal property view – but halving the benefit for children nods in the direction of a rebate. Paying dividends quarterly reflects both practical and political concerns. They’d be less complicated, less costly to administer, and more visible than smaller, monthly payments.

Unfortunately, the dividend would be somewhat less than the amount of revenue collected by the tax. If life were simple, outgoing dividends would equal incoming carbon tax receipts. But rebating all the revenue would significantly increase budget deficits.

Why? Because it would cost the government money to manage the tax and dividend program. And the government itself would bear some of the cost of the carbon tax. To keep from adding to the deficit, the government must keep enough revenue to cover those costs.

To illustrate, suppose a carbon tax of $43 per metric ton goes into effect in 2021, as the Climate Leadership Council has proposed. Gross revenues would be about $200 billion. It would cost the government about $6 billion to operate the dividend program and cuts in other revenues and higher spending would total more than $40 billion. Thus, to avoid deficit increases, the dividend pool would be about $150 billion.

Even with these offsets, we estimate that eligible adults would receive an annual dividend of $570 in 2021 while a family of two adults and two children would get $1,710.

Different design choices could raise or lower these amounts. Collecting income tax on dividends, for example, would allow larger dividends. But the after-tax dividend would be the same, on average, with more going to people in lower income tax brackets and less to those in higher ones. Different treatment of children also would change dividends. Giving children full dividends, for example, would reduce dividends for adults, but increase them for families with children. Dividend amounts could also vary depending on eligibility, participation rates, the size of the carbon tax, and other factors.

In short, details matter in designing carbon dividends. We hope our paper provides a useful guide to those details and the choices and tradeoffs that carbon dividends pose.

The existing environmental regulatory architecture, largely erected in the 1970s, is outdated and ill-suited to address contemporary environmental concerns. Any debate on the future of environmental protection, if it is to be meaningful, must span the political spectrum. Yet there is little engagement in the substance of environmental policy from the political right. Conservatives have largely failed to consider how the nation’s environmental goals may be best achieved. Perhaps as a consequence, the general premises underlying existing environmental laws have gone unchallenged and few meaningful reforms have proposed, let alone adopted. This essay, prepared for the Duke Law School conference on “Conservative Visions of Our Environmental Future,” represents a small effort to fill this void. Specifically, this essay briefly outlines a conservative alternative to the conventional environmental paradigm. After surveying contemporary conservative approaches to environmental policies, it briefly sketches some problems with the conventional environmental paradigm, particularly its emphasis on prescriptive regulation and the centralization of regulatory authority in the hands of the federal government. The essay then concludes with a summary of several environmental principles that could provide the basis for a conservative alternative to conventional environmental policies.

One example of what he thinks ought to be a conservative approach to resource protection: property rights in fisheries (footnotes omitted):

The benefits of property rights at promoting both economic efficiency and environmental stewardship can be seen in the context of fisheries. For decades, fishery economists have argued that the creation of property rights in ocean fisheries, such as through the recognition of “catch-shares,” would eliminate the tragedy of the commons and avoid the pathologies of traditional fishery regulation. The imposition of limits on entry, gear, total catches, or fishing seasons has not proven particularly effective. Property-based management systems, on the other hand, have been shown to increase the efficiency and sustainability of the fisheries by aligning the interests of fishers with the underlying resource. A recent study in Science, for example, looked at over 11,000 fisheries over a fifty-year period and found clear evidence that the adoption of property-based management regimes prevents fishery collapse. Other research has confirmed both the economic and ecological benefits of property-based fishery management. The recognition of property rights in marine resources can also make it easier to adopt additional conservation measures. For instance, the adoption of catch-shares can reduce the incremental burden from the imposition of by-catch limits or the creation of marine reserves. A shift to catch-shares would have fiscal benefits as well. Yet in recent years, the greatest opposition to the adoption of such property-based management regimes has not come from progressive environmentalist groups, but from Republicans in Congress.

He also endorses a carbon tax, which combines responsibility (the polluter pays principle) with a move toward consumption taxation.

Here’s a good laugh line if you find yourself in a policy meeting about how to reduce gasoline use: suggest increasing the gasoline tax. During my time in the White House, I attended several meetings on this topic, and inevitably someone (sometimes me) would offer that simple idea. Everyone would then chuckle at its political insanity, and the conversation would turn to Washington’s policy of choice, increasing fuel efficiency standards for autos and cars.

Those standards certainly can reduce future gasoline usage. But they are an incredibly inefficient way to do so. For some new evidence of just how inefficient, let’s turn the microphone over to the aptly-named Valerie Karplus, an MIT researcher, writing in the New York Times:

Politicians of both parties understandably fear that raising the gas tax would enrage voters. It certainly wouldn’t make lives easier for struggling families. But the gasoline tax is a tool of energy and transportation policy, not social policy, like the minimum wage.

Instead of penalizing gasoline use, however, the Obama administration chose a familiar and politically easier path: raising fuel-efficiency standards for cars and light trucks. The White House said last year that the gas savings would be comparable to lowering the price of gasoline by $1 a gallon by 2025. But it will have no effect on the 230 million passenger vehicles now on the road.

Greater efficiency packs less of a psychological punch because consumers pay more only when they buy a new car. In contrast, motorists are reminded regularly of the price at the pump. But the new fuel-efficiency standards are far less efficient than raising gasoline prices.

In a paper published online this week in the journal Energy Economics, I and other scientists at the Massachusetts Institute of Technology estimate that the new standards will cost the economy on the whole — for the same reduction in gas use — at least six times more than a federal gas tax of roughly 45 cents per dollar of gasoline. That is because a gas tax provides immediate, direct incentives for drivers to reduce gasoline use, while the efficiency standards must squeeze the reduction out of new vehicles only. The new standards also encourage more driving, not less. (Emphasis added.)

A gas tax wouldn’t be a win-win all around, of course. People would pay more in taxes immediately. So you might well want to pair the tax with other policies (e.g., offsetting tax reductions) to ameliorate that hit. (The same concern applies to carbon taxes.)

Creating property rights has helped protect fisheries while making the fishing industry more efficient, according to a nice blog post by Eric Pooley of the Environmental Defense Fund (ht: Dick Thaler). Writing at the Harvard Business Review, Pooley notes the success of the “catch share” approach to fisheries management:

The Gulf of Mexico red snapper fishery, for example, was on the brink of collapse in the early part of the last decade. Fishermen were limited to 52-day seasons that were getting shorter every year. The shortened seasons, an attempt to counter overfishing, hurt fishermen economically and created unsafe “derbies” that often forced them to race into storms like the boats in The Deadliest Catch.

This short window also meant that all of the red snapper were being caught and brought to market at the same time, creating a glut that crashed prices. Many fishermen couldn’t even cover the cost of their trip to sea after selling their fish.

A decade ago, the Environmental Defense Fund began working with a group of commercial red snapper fishermen on a new and better way of doing business. Together, we set out to propose a catch share management system for snapper.

Simply put, fishermen would be allocated shares based on their catch history (the average amount of fish in pounds they landed each year) of the scientifically determined amount of fish allowed for catch each year (the catch limit). Fishermen could then fish within their shares, or quota, all year long, giving them the flexibility they needed to run their businesses.

This meant no more fishing in dangerously bad weather and no more market gluts. For the consumer, it meant fresh red snapper all year long.

After five years of catch share management, the Gulf of Mexico red snapper fishery is growing because fishermen are staying within the scientific limits. Boats that once suffered from ever-shortening seasons have seen a 60% increase in the amount of fish they are allowed to catch. Having a percentage share of the fishery means fishermen have a built-in incentive to husband the resource, so it will continue to grow.

Please read the rest of his piece for additional examples in the United States and around the world. Catch shares don’t deserve all the credit for fishery rebounds (catch limits presumably played a significant role), but they appear to be a much better way to manage limited stocks.

One small quibble: Pooley refers to catch shares as an example of behavioral economics in action. That must be a sign of just how fashionable behavioral economics–the integration of psychology into economics–has become. In this case, though, the story is straight-up economics: incentives and property rights.

Twenty years ago, world leaders gathered in Rio de Janeiro to grapple with climate change, biological diversity, and other environmental challenges. Today they are back again, but with much less fanfare. If my Twitter feed is any indication, Rio+20 is getting much less attention that the original Earth Summit.

One item that deserves attention is greater emphasis on getting business involved in protecting the environment. For example, two dozen leading businesses–from Alcoa to Xerox–teamed up with The Nature Conservancy on a vision for The New Business Imperative: Valuing Natural Capital (interactive, pdf).

The report lays out the business case that natural resources have real economic value, even if they aren’t traded in markets, and that protecting them can sometimes reduce costs, maintain supplies, soften the blow of future regulation, and build goodwill with customers, communities, and workers. All kind of obvious, at one level, but nonetheless useful to see in print with examples and commitments.

One item that caught my eye is the potential for “green” infrastructure to replace “gray”:

Strong, reliable manmade (“gray”) infrastructure undergirds a healthy marketplace, and most companies depend heavily on it to operate effectively and efficiently. Yet increasingly, companies are seeing the enormous potential for “natural infrastructure” in the form of wetlands and forests, watersheds and coastal habitats to perform many of the same tasks as gray infrastructure — sometimes better and more cheaply.

For instance, investing in protection of coral reefs and mangroves can provide a stronger barrier to protect coastal operations against flooding and storm surge during extreme weather, while inland flooding can be reduced by strategic investments in catchment forests, vegetation and marshes. Forests are also crucial for maintaining usable freshwater sources, as well as for naturally regulating water flow.

Putting funds into maintaining a wetland near a processing or manufacturing plant can be a more cost- effective way of meeting regulatory requirements than building a wastewater treatment facility, as evidenced by the Dow Chemical Seadrift, Texas facility, where a 110-acre constructed wetland provides tertiary wastewater treatment of five million gallons a day. While the cost of a traditional “gray”treatment installation averages >$40 million, Dow’s up-front costs were just $1.4 million.

For companies reliant on agricultural systems, improved land management of forests and ecosystems along field edges and streams, along with the introduction of more diversified and resilient sustainable agriculture systems, can minimize dependency on external inputs like artificial fertilizers, pesticides and blue irrigation water.

To encourage such investments, where they make sense, lawmakers and regulators need to focus on performance–is the wastewater getting clean?–rather than the use of specific technologies or construction.

Yes, argues MIT Professor Christopher Knittel, in a new discussion paper for the Hamilton Project. Given the now-enormous spread between gasoline and natural gas prices, Knittel thinks that natural gas vehicles should become increasingly popular. Here, for example, are his calculations of the lifetime operating costs for various vehicles using gasoline or natural gas (click to enlarge, and be sure to read the caveat in the footnote):

As you would expect, the biggest potential savings accrue to the most fuel-guzzling vehicles, heavy-duty trucks in particular.

Knittel does not believe, however, that the private market will exploit this potential as fast or extensively as it should. He thus proposes policies to accelerate refueling infrastructure build-out and to encourage natural gas vehicles. Here’s his abstract:

Technological advances in horizontal drilling deep underground have led to large-scale discoveries of natural gas reserves that are now economical to access. This, along with increases in oil prices, has fundamentally changed the relative price of oil and natural gas in the United States. As of December 2011, oil was trading at a 500 percent premium over natural gas. This ratio has a number of policy goals related to energy. Natural gas can replace oil in transportation through a number of channels. However, the field between natural gas as a transportation fuel and petroleum-based fuels is not level. Given this uneven playing field, left to its own devices, the market is unlikely to lead to an efficient mix of petroleum- and natural gas-based fuels. This paper presents a pair of policy proposals designed to increase the nation’s energy security, decrease the susceptibility of the U.S. economy to recessions caused by oil-price shocks, and reduce greenhouse gas emissions and other pollutants. First, I propose improving the natural gas fueling infrastructure in homes, at local distribution companies, and along long-haul trucking routes. Second, I offer steps to promote the use of natural gas vehicles and fuels.

His “steps to promote the use of natural gas vehicles and fuels” are subsidies and regulations. Regular readers will recall that I believe environmental taxes would be a better way of addressing environmental concerns and, in particular, of promoting natural gas over gasoline. Of course, that view hasn’t gained much traction among policymakers. As least not yet.